Nothing sends chills down the spines of market operators than “stagflation” fears, which are running hot today after a somewhat foreboding November inflation report. With the Federal Reserve likely to accelerate the tapering of its bond-buying program amid rampant inflation, investor fears aren’t unwarranted.
With November’s Consumer Price Index (CPI) report showing a 0.7% increase, year-to-date inflation is 6.8%. That is its highest level since 1982. It’s no secret inflation has been more than transitory as the Fed rushes to raise interest rates. But it’s unclear if the pending taper will be a taper at all as it pertains to the economic repercussions.
The economy is running hot. The reopening process unleashed a wave of pent-up demand in the U.S., which, combined with zero percent interest rates and surprisingly strong gross domestic product (GDP) growth, has markets at record highs across the board. The worker shortages alone are evidence enough of that. If it’s too good to be true, it probably isn’t: Some analysts see a major correction coming.
Most analysts agree that sustained growth of this kind is, well, unsustainable. Whether or not the current growth will be detrimental long-term, is where many industry experts disagree.
What Analysts Think Following the November Inflation Report
- Oxford Economics Chief Gregory Daco believes the thriving economy is just that. “It may not feel like it given the elevated inflation environment, renewed COVID concerns and heightened market volatility, but the economy is booming.”
- Mohamel El-Erian, chief economic advisor at financial services company Allianz, is unabashedly worried about the current inflation levels, arguing it’s far from just transitory. “It is not clear to me why it is we need emergency levels of asset purchases, emergency levels of interest rates, at a time when, the emergency has passed,” he argues. “When you run an emergency monetary policy when you don’t have an emergency you start worrying about the unintended consequences and the collateral damage. There’s underlying damage happening.”
- Meanwhile, the analysts at investment giant Goldman Sachs see a resilient U.S. economy thriving well into the future. Citing reduced Covid-19 risks fueling strong consumer spending and job growth, it lowered its GDP growth forecast from 4.2% to 3.8%. That is still higher than the average growth rate of 3.13% from 1948 until 2021.
- Allen Sinai, strategist at Decision Economics, thinks highly of the current hyperactive economy. “We have tremendous spending by consumers. A lot of people are getting hired. Demand is huge.” Sinai believes that, even after monetary policy restraints, the economy will still be running hot. “Even after doing that, the economy should still be in super shape producing growth rates and earnings not seen in decades,” he told the Wall Street Journal.
On the date of publication, Shrey Dua did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
More From InvestorPlace
